When it comes to overhauling the banks, there is one handy rule of thumb: if it isn't hurting, it isn't working. Bankers must inevitably face some pain if taxpayers are to be made safer and economies more productive. This is not about retribution or vindictiveness, but simply an acknowledgment of the reality that the scope and scale of the changes to the banking system necessary to avoid a rerun of the great crisis of 2008-09 are big and radical. And this has been a matter of consensus between regulators, central bank chiefs, economists and politicians. Indeed, in the runup to last May's general election, Vince Cable and George Osborne competed with each other for the prize of being toughest on the banks.

Yet, listening tonight to Mr Osborne's second Mansion House speech as chancellor, it was clear that he had nothing up his sleeve that would cause any banker much discomfort. "London has topped the global league table of financial centres," he told the assembled City grandees. "We've got to stay in pole position." To this end, he briefed newspapers of his support for a ringfence around the retail operations of big banks, so that giant losses from their investment operations would not force the taxpayers to step in again. This is not a bad idea, as far as it goes; the only trouble is that it does not go very far. The City was not especially bothered by the proposal, originally suggested by Sir John Vickers and the Independent Commission on Banking. That much was clear by investors' reaction to the briefing. They marked down shares in the big five banks by an average of two percentage points on the day.

Ringfencing certainly does not match up to the promises made not so long ago by Mr Osborne as shadow chancellor that he would drive big banks to split into their high-finance and high-street units. And it certainly falls far short of Vince Cable's thunder in the runup to the general election last May. "Casinos belong in Las Vegas not in banking," Mr Cable famously remarked. "We want straightforward, simple banks which do the basics well; not laboratories for financial rocket scientists." Now business secretary, Mr Cable was not in the UK today to see another of his touchstone policies thrown away. Voters may also remember how Nick Clegg talked of turning the nationalised Northern Rock back into a building society, while Mr Osborne briefed reporters that he wanted to privatise it in a Tell Sid-style campaign. Tonight, both those pledges were binned, as the chancellor announced he now favoured selling the bank for £1bn to a bidder.

Taken together, and added to the junking of Labour's bonus tax and the watering-down of the coalition's own levy on bank balance sheets, the message is clear: Mr Osborne does want changes to the banking industry – but so small and so gentle that the financiers will barely feel them. If during the boom the Labour government was guilty of light-touch regulation, what the coalition is offering now is light-touch reform.

This is certainly not what either the Lib Dems or the Conservatives vowed in the general election. But there is more to this than the reneging on a promise. Speaking tonight, the chancellor talked of the British dilemma: yes, he wanted safer banks, but he also wanted a booming financial system. This does not answer the bigger questions about the future of the British economy: how will David Cameron achieve his "rebalancing" away from finance if bankers go back to business as usual? How will Mr Osborne get his "march of the makers" unless there is a better system for getting finance to manufacturers? Sorting out the banks is not just about making them more stable – it is also about using them to kickstart a wider economic renaissance. Tonight, the chancellor unveiled some proposals aimed at achieving the first objective, but without even a token stab at the bigger task.